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New IRS Tool Helps Retirees Figure Taxes on Social Security Benefits

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Retirees can now determine the correct amount of tax to be taken out of their pension payments by using the Tax Withholding Estimator, which replaced the Withholding Calculator on in August.

The estimator is designed to meet the needs of retirees who receive pension payments and Social Security benefits. It enables them, as well as wage-earners and self-employed individuals, to check their withholding.

The estimator employs a six-step question-and-answer format using information such as marital or filing status, income, withholding, adjustments, deductions and credits.

Retirees can enter any pension income or Social Security benefits they or their spouse receive. The tool automatically calculates the taxable portion and incorporates this into an overall estimate of their projected tax liability and withholding for the year.

If a withholding change is needed, the retiree can choose a tax due of close to zero or a refund amount. The estimator will then link to Form W-4P, Withholding Certificate for Pension or Annuity Payments, and give the retiree a specific withholding recommendation based on the option chosen. It will also give instructions on how to fill in each line of the form.

The Internal Revenue Service will hold a free two-hour webinar on Thursday, Sept. 19 at 2 p.m. Eastern time, featuring step-by-step instructions on how to use the new estimator and a live question-and-answer session.

Enhancements for Everyone

The estimator offers other new features, including:

  • Plain language to improve taxpayer understanding
  • Mobile-friendly design
  • Progress tracker to let taxpayers know how much more information they need to enter
  • Ability to go back and forth through the steps, correct previous entries and skip questions that do not apply
  • Tips and links to help users determine whether they qualify for various tax credits and deductions
  • Automatic calculation of taxes on self-employment income

The IRS in a statement urged both pension recipients and wage-earners to do a paycheck checkup now and review their withholding for 2019. It said this was especially important for those who faced an unexpected tax bill or penalty when they filed earlier this year.

A paycheck checkup is also a critical step for anyone who made withholding adjustments in 2018 or had a major life change, such as marriage, birth of a child, adoption or home purchase.

“People most at risk of having too little tax withheld include those who itemized in the past, but now take the increased standard deduction,” the IRS said. “They also include households with two wage earners, employees with non-wage sources of income and those with complex tax situations.”

The agency also said anyone who changes the withholding amount in the middle or latter part of this year should do another paycheck checkup in January to ensure that he or she has the right amount of tax withheld for all of 2020.

— Check out 10 ‘Must Know’ FAQs on Social Security on ThinkAdvisor.